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Measuring Plant Performance by the Common Denominator in Business

For the sake of its own survival, a business must make money. And it must make more money than it spends. A business that spends more money than it makes is cannibalizing itself – and if not corrected will eventually fail. This is not controversial; it is a fact of reality for all commercial entities. Because of this fact, the default “language” of any business is cash. Sure there are many aspects that all make up the DNA of a business such as company culture, employee safety, product quality, and so forth. However, you can look at cash flow as the end-all-be-all indicator of the company’s health. Granted every company experiences periods of heavy investment where cash out may be greater than cash in. This is not necessarily a bad thing, especially when you can draw a logical and justifiable link to how the cash being invested will result in greater cash flow in the future. On the other hand, if cash out is greater than cash in but there is no clear link between investment and greater future returns, some serious questions need to be asked about what is happening and what needs to be done about it.

With that said, people know cash. Everyone on earth has some relationship with and some degree of understanding of it. Good or bad, its a fixed part of the human existence and has been since the beginning of documented human life. Cash is also the life blood of any manufacturing process. At the highest levels in just about all manufacturing organizations, cash out is managed to varying degrees of granularity. At the lowest levels in the org chart, the focus of the manufacturing operation is simply to hit schedule for the day. It doesn’t matter if hitting schedule means producing way more or less than anyone will buy; it just matters that we hit schedule. The point is that there is a disconnect between what happens in the boardroom (where the priority is increasing cash flow) and the shop floor (where hitting schedule among a host of other things is the priority). Somewhere along the chain of command, the focus on cash gets lost in the mix as you progress to the shop floor level. At some point, performance is no longer measured in gains and losses in cash and it gets measured by all these other things that just create room for misalignment to breed. At the end of the day, the shop floor operator or mechanic has the power. On a day to day operational level, they make the decisions that will greatly influence rather the factory will gain or lose cash (or equivalent value) for that day. Unfortunately, since the typical manufacturer doesn’t measure the performance of the shop floor operator in terms of cash (or value), it becomes very difficult if not impossible for that operator to understand how their minute by minute actions are helping or hurting the company.

In an ideal arrangement, a line operator would know in real time how much value they are bringing to the business in terms of cash. This might mean quantifying the value of one finished unit (or set of value added actions) and subtracting material, conversion, and overhead cost, and presenting the result in real time. It would be made clear what specific area of the overall cost that operator has complete control over so they can quickly and easily test the financial result of one action versus another. The overall cash impact of quality failures would also be factored in to keep the system honest. This puts the shop floor operator in a position of true ownership for their process and lays the foundation for continuous improvement at a daily / micro level.

Such a system might require a respectable investment and may not be feasible for many manufacturers. However, all manufacturers should seek to increasingly improve the frequency at which value could be quantified and reported at the shop floor operator level. Monthly financial reports just aren’t sufficient for leveraging the financial function as a driver of a continuous improvement culture. At least once or twice a day, an operator or mechanic needs to be able to quantify exactly how much value they have brought to the business given the amount of time they have been on the clock. This also lets the operator know if they have more or less contributed their fair share for the day. This makes the job of the operator, their managers, on up to the CEO that much easier. Experienced professionals such as those at Manuficient can help develop the most appropriate operating systems for your specific situation using the finance function as a lever for continuous improvement.